TMFAleph1 (92.14)

3 Myths Concerning the Debt Market Crisis

0

More thoughts on the role of the Fed and the current market crisis. First, it may be useful to debunk some pesky myths that appear to be polluting current economic and financial commentary:

Home ownership is a responsibility, not a right

Homeowners that cannot keep up with rising payments on the home mortgages are not entitled to a bailout by the federal government, despite what Bill Gross of PIMCO recommends. Pundits have thrown the expression “moral hazard’ around for weeks now, but there seems to have been little substantive discussion of its meaning and effects.

The Fed doesn’t have a mandate to avoid a recession at any cost.

Price stability (i.e. avoiding inflation) is (or has been) the Fed’s primary goal. Mollifying the extremes of the business cycle may be a secondary goal, but there is no reason that the Fed need take drastic action simply to avoid a recession. Recessions are probably part of the natural order of things as far as the economic cycle is concerned.

A 50 basis point rate cut will not by itself solve fundamental problems in the housing and debt markets.

The bubble that built up in the housing and debt markets is substantial. The rate cut may provide temporary relief to certain market participants, but it doesn’t do anything to solve the problems created by large amounts of poor quality loans that were improperly priced at inception.

I’m short this morning – 300 words is quite a bit tougher than I expected.

Total: 250 words

*** The above text was written (and spell-checked) in ten minutes. As a result, some of it may not stand up to rational scrutiny. I apologize preemptively for any errors, omissions and misrepresentations. ***